Government: Mandating market conditions, not outcomes

In the two weeks since the Supreme Court ruled that the Patient Pro­tec­tion and Afford­able Care Act was con­sti­tu­tional (given the tax­ing capa­bil­i­ties of the fed­eral gov­ern­ment), sup­port­ers have told oppo­nents “it is time to get over it” and deal with the impli­ca­tions of what detrac­tors still call “Oba­macare.” Depend­ing upon the out­come of the Novem­ber elec­tions, it may well be time to “get over it” and con­sider impli­ca­tions. In the final analy­sis, how­ever, those who advo­cate for the Afford­able Care Law may find them­selves unpleas­antly sur­prised by the reac­tion of markets.

It is impor­tant to under­stand the role of gov­ern­ment actions — fed­eral, state or local — in a largely market-driven econ­omy. While gov­ern­ment can dic­tate cer­tain mar­ket con­di­tions, it has no abil­ity to man­date mar­ket out­comes. Such an all-consuming gov­ern­ment role is reserved solely for a com­mand econ­omy where gov­ern­ment makes all eco­nomic deci­sions in a top-down, cen­tral­ized plan­ning approach.

So, what are the likely out­comes that might be expected should Amer­i­cans be required to “get over it”? To take a rea­son­able stab at such a com­plex issue, it is best to start with the non-government play­ers in health­care decision-making and the man­dated changes they must accommodate.

In the case of busi­nesses, they must (depend­ing upon their size as mea­sured by num­ber of full time employ­ees) pro­vide insur­ance cov­er­age for work­ers or pay a penalty … oops, I mean pay a tax, as defined by the Supreme Court. But con­sider how busi­nesses may react.

First, they could find that the cost of the “tax” is less than the cost of offer­ing the man­dated min­i­mum health insur­ance pack­ages (which includes all applic­a­ble inter­nal HR func­tions) required by the fed­eral gov­ern­ment. To date, indi­ca­tions from survey-based research sug­gest at least one-third of com­pa­nies may opt-out and pay the tax. If true, so much for the notion that if you like your cur­rent insur­ance you can keep your cur­rent insur­ance. As an alter­na­tive, busi­nesses could avoid some man­dates by keep­ing full-time employ­ment lev­els below 50 by either not hir­ing as many full-time work­ers and/or rely­ing more heav­ily upon part-time employ­ees … well, there go labor markets.

Next, con­sider insur­ance com­pa­nies and how they might respond. While min­i­mum health insur­ance pack­ages can be man­dated, there is no require­ment that insur­ance com­pa­nies pro­vide such cov­er­age in a non-profitable way. So in response, insur­ance com­pa­nies will likely raise prices to cus­tomers so as to com­ply with the require­ment that 80 per­cent of pre­mi­ums be spent on pro­vid­ing actual health­care ben­e­fits. As time pro­gresses, peo­ple (via higher premiums-deductibles-co-pays) spend far more for the man­dated cov­er­age … mak­ing cov­er­age sig­nif­i­cantly less “afford­able” in the final analysis.

And what of health­care providers, such as doc­tors? As mat­ters now stand, doc­tors pro­vid­ing health­care to Medicare/Medicaid patients must do so at the government’s reim­burse­ment rates. But in an effort to con­trol gov­ern­ment expen­di­tures, in the late 1990s the gov­ern­ment began low­er­ing reim­burse­ment rates. Sounds like a great idea, unless you are the poor doc­tor stuck with an unsus­tain­able cash-flow prob­lem. Over time, impacted doc­tors have issued peri­odic warn­ings that if the man­dated reim­burse­ment reduc­tions are insti­tuted, they (doc­tors) will not accept new Medicare/Medicaid patients and may start drop­ping those they cur­rently serve. As a result, for the past sev­eral years, a “doc fix” has been patched together to tem­porar­ily sus­pend reim­burse­ment rate reduc­tions. If the approx­i­mately 30 per­cent reduc­tions are allowed to become func­tional (now required to help par­tially fund the Afford­able Care Law via cost-savings), then some Medicare/Medicaid patients may find them­selves with government-provided health insur­ance but no access to actual med­ical care, a tremen­dously impor­tant distinction.

Finally, con­sider “the rich” who are being man­dated to help pay for the expanded health insur­ance cov­er­age of oth­ers. This comes in the form of higher Medicare taxes (an extra 0.9 per­cent­age points) and a 3.8 per­cent sur­tax on applic­a­ble invest­ment income. But what hap­pens if “rich” peo­ple decide to not work as much — there go the rev­enues from the 0.9 per­cent extra Medicare tax — or if they move their invest­ments to areas not taxed by the U.S. government?

While there is no way of know­ing pre­cisely what mar­ket par­tic­i­pants will do, it seems rea­son­able to assume they will do what is in their best inter­ests, within the con­fines of the gov­ern­ment man­dates. But since gov­ern­ment can only man­date con­di­tions under which mar­ket behav­ior must occur, the actual out­comes which Amer­i­cans face may be quite dif­fer­ent from the health­care nir­vana envi­sioned under the Afford­able Care Law.

Dr. James New­ton serves as chief eco­nomic advi­sor to Com­merce National Bank and is an aux­il­iary fac­ulty mem­ber in eco­nom­ics and sta­tis­tics at OSU-Marion and OSU-Newark. Dr. Newton’s views do not nec­es­sar­ily reflect those of Com­merce National Bank or OSU-Marion/Newark.

Posted by Jim Newton on Jul 10 2012. You can follow any responses to this entry through the RSS Feed. Comments can be made below.